Covet Thy Neighbors' Investments?

Mark Hulbert of the New York Times: "The impulse to keep up with Joneses plays an enormous role in the behavior of consumers, whether they’re shopping for clothing or toothpaste, buying a home or deciding which school ought to be entrusted with their children."

In the language of psychology, we call this the power of Social Proof, which tells us that people look to what similar others (read: peers) are doing for guidance in making our decisions.

Hulbert continues: "It turns out that the investing arena is no different. When making changes in their portfolios, people pay a great deal of attention to what their neighbors are doing.

That’s the conclusion of a new study, “Information Diffusion Effects In Individual Investors’ Common Stock Purchases: Covet Thy Neighbors’ Investment Choices,” which appears in the July issue of The Review of Financial Studies. Its authors are Zoran Ivkovich and Scott J. Weisbenner, assistant professors of finance at the University of Illinois."

Read the rest of Hulbert's article here.